Mortgage

Mortgage Law, Mortgage Modification, and Foreclosure: What’s the Deal with my Second Mortgage, Revisited

Hi Folks. So I want to revisit second mortgages with you. I wrote an entry on this a while back that seems to been very popular. Thus, I feel that it may be time to go over issue with not paying a second mortgage again. Specifically I’d like to go over secured v. unsecured, charging off, collection activity, and even settlement.

What does it mean to have a secured mortgage? In simple terms, it means that your lender can foreclose on your house, sell it, and take the proceeds to pay the debt/mortgage. In other words, your debt is secured by the home. Well that is all good when your home has some equity in it; but what about days like this where home values are depressed?

Lots of folks have purchased homes in the last several years with no money down and a 1st mortgage for 80% of the value of the home and a second mortgage for 20% of the value of the home. I’m running into many folks who have the situation above AND are in some kind of interest only loan. Finally these same people have lost significant value in their home and often owe more on their first mortgage than the home is worth. So are you in a similar situation? At least one where you owe more than your home is worth? That is a situation where a second mortgage can become unsecured.

If you have value in your home the Holder of your second mortgage has to buy out the first mortgage, then foreclose on the property, then sell it before they get their money. They aren’t going to do that if the transaction leaves them little to no chance to get money out of the deal.

Let’s say you owe $80,000 on your first, $20,000 on your second and your home is worth $75,000. Why would the holder of your second mortgage pay $80,000 to get $75,000 back and still not get their original $20,000? Does that make sense? Of course I am skipping all kinds of other transaction costs in that scenario; but hopefully you get the idea.

When you owe money to a company, they put that amount on the Asset side of their accounting books. This works well when you are paying; but what happens if you can’t pay? Well accounting principles say that that business has to put that amount on the liability side of their accounting books. Their other option is to foreclose, and as seen above that doesn’t make sense. So when your lender decides to write of the debt v. collecting on it through foreclosure; it becomes unsecured. That is when they will collect on the debt, much like they would a credit card. Next time I’m going to go over what to expect with collection activity on your charged off second mortgage.

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